Transcript QAV 349 – CAPE & Kelly

Filename: QAV 349 – CAPE & Kelly

Duration: 59:39

Tony Kynaston: 00:07 Welcome back to QAV Tony Kynaston’s episode 349, season 349. Recorded this one of our final days of Trump Monday the 26th of October, 2020 3:08 PM, Queensland time.

Cameron Reilly: 00:25 That’s a big call.

Tony Kynaston: 00:27 You think? You think it’s a big call?

Cameron Reilly: 00:29 I do. I think he’s still in with a big chance.

Tony Kynaston: 00:33 Really? What are you basing that on?

Cameron Reilly: 00:35 38 percent of the vote will vote for him, and I think they’ll like elections. I don’t think they’ve had 76 percent turnout in an election since I don’t know for a hundred years at least. They’re lucky if they get 60 percent, so if he gets 38, he’s home.

Tony Kynaston: 00:54 Well then, he doesn’t get 38 percent of the entire population, he gets 30 percent of the people who turn up, which is 60 percent. So, it’s 38 percent of 60, so there’s still a lot less than 50 percent of 60 percent.

Cameron Reilly: 01:05 Well, he got more than 50, now you got a bit less. He gets more than 38 percent of the people turning up.

Tony Kynaston: 01:14 What I’m saying is that he gets 38 percent of people anyway, and they over-represent during the elections.

Cameron Reilly: 01:21 Well, maybe. It depends, but I’m wondering your checklist for figuring out his chances is it your QAV checklist or is it your Pony’s checklist, because your Pony’s checklist my friend.

Tony Kynaston: 01:37 You haven’t seen my Pony’s checklist. I had a good day on the pump on Saturday.

Cameron Reilly: 01:41 Well, I’m just talking about your actual ponies on like nil for five at the moment, I think betting on your horses.

Tony Kynaston: 01:48 Oh, we drew a win.

Cameron Reilly: 01:50 Yeah. Bellamy Patina ran second, which was a bit frustrating. She drew a very wide barrier and couldn’t get in, so, but she ran really well.

Tony Kynaston: 01:59 Yeah, I agree. It’s frustrating for us too.

Cameron Reilly: 02:03 More for you than for me I think, but thanks for your support. Yeah. You’ve got millions invested in these horses. I’ve put like 25 bucks by the last week, which millions for you is like 25 bucks for me, yeah but still. Well, it’s all good fun.

Tony Kynaston: 02:26 It is.

Cameron Reilly: 02:26 Well, we’ll see what happens. So, the US election is what?

Tony Kynaston: 02:29 Basically a week away.

Cameron Reilly: 02:32 Yeah. Next Tuesday or next Tuesday daytime.

Tony Kynaston: 02:34 Of course we probably won’t know the result for weeks after that. They tell us, so that should be a fun period. Fun and games. I have popcorn ready. Lots of mail-in voting going on, so that’ll take a while to count, and of course there’ll be disputations all over the place and including Trump will dispute leaving potentially, so nice.

Cameron Reilly: 02:55 Well, before we get into the Q and A for this week, I wanted to let you know that eagle-eyed and very engaged. I think Brett must still be on the COVID tit, whatever it is called, job seeker, because he sent us like 15 detailed emails this week, which is great. We appreciate it, Brett, but he’s also done a lot of coding work on the dummy portfolio. So, if you have a look at the dummy portfolio in the last tab, I have a throw in his version of the dummy portfolio in there. He’s created some code that all dramatically throws in the sell price, and I haven’t gone through it in detail, because I haven’t had time be because it’ll probably be over my head, but I did compare it with the manual sell prices that I had eyeballed and they seem to be about the same. So, I thought you might want to take a look at that sometime if you have the time.

Tony Kynaston: 04:02 Yeah, sure. I’ll do that. I haven’t seen it yet. I do have seen some of the emails from Brett, which is good.

Cameron Reilly: 04:10 Oh, we’re going to get into those in a minute. Yeah.

Tony Kynaston: 04:13 Yeah. They’re great. Yeah.

Cameron Reilly: 04:15 Detailed. Graphs, charts, everything.

Tony Kynaston: 04:18 Okay. So, I’ll buy it with test, auto sell price list. Okay. I’ll have a look at it.

Cameron Reilly: 04:25 He’s taken, I think your sell price calculator and put it into the dummy portfolio, which is you know, it looks good. It looks great, and then it also tells us what to do. Hold, so, you know, I don’t have to compare my sell price with the current price manually.

Tony Kynaston: 04:42 [Cross-talk 00:04:42].

Cameron Reilly: 04:45 That’s the one that Brett sent us as a standalone spreadsheet.

Tony Kynaston: 04:49 Got it.

Cameron Reilly: 04:50 Yeah, and then he did, and then he put it into Google Sheets. I think it was already in Google Sheets, he put it into Excel, but then he said to me, look, I can share with you my Google Sheet version of it, and I go, well, that’s easy. I can just copy that into mine. So anyway, we’ll have a look at that. People can check that out and see what you think. See if you think it is up to scratch, but thank you to Brett for putting in that effort. We appreciate it. Doctor Copper, Tony, Doctor Coal. No, before we talk about Doctor Copper, we have to talk about GRR and CAA.

Tony Kynaston: 05:22 Oh, it’s all part of the same thing. So, let’s talk about the whole lot together.

Cameron Reilly: 05:26 Okay. Alrighty then.

Tony Kynaston: 05:28 Yeah. Okay. So, I’ve read an article in the AFR on the weekend talking about Doctor Copper, and that’s an old name for copper or an old name in the share market for copper, and it’s called Doctor Copper because it’s often a leading indicator of improvement in the global economy, and so therefore it’s like a professor of the global economy, Doctor Copper. Anyway, so that made me, and the reason for just before I go, and the reason for that is copper is often used in you know building homes, a very expanding then copper gets used more and that’s a sign of global growth.

Anyway, so I went to index Monday and had a look at the copper price and thought, yeah, it’s just gone through a three-point buy-line, and that’s something I remember happened at the time that I started buying gold shares four odd years ago, and I think it probably coincided reasonably close with water skiing metals group in terms of iron ore prices, but I’m not sure about that one. Anyway, so I had a look at our buyer list and the only sort of standalone copper company we have on the buyer list is C6C Copper Mountain, which is a small one, but it has its share price graph is shut up in the last couple of weeks.

So, I’m thinking that there probably is a bit of a case to look at these changes in commodity prices and look at our buyer list and promote something which may be lower down the list and buy it next, just on the strength of the underlying commodity, going through a buy signal, and I went through the next morning, had a look at the other metals as well, and it also, the three point by-lines also happening, not just for copper, but also aluminum and zinc and going through our lists, we don’t have any zinc plays or very few standalone zinc miners that I can think of, but there’s is an aluminum company, CAA, Capital Aluminum, and that’s on our list too. So, my thought was we bought GRR last week and that’s, I think about the same price as what we paid for it.

So, I think we might swap that out of a dummy portfolio and swap in CAA, which is higher on our buyer list than C6C, but I’m also thinking Cam that we might swap out SchafferCorp. The second purchase of SchafferCorp, which has come back a little bit, but still hasn’t done much for our portfolio since we bought it after the last results, swap that out for C6C. So, we have some exposure to the upturn in copper and aluminum, and just to go a bit further with that, I wanted to clear that nickel also went through it three points by a line or maybe a month or two ago, and I did the same process back then, and I found a company called whose code is NIC. I think it just called Nickel Mines, and I bought a little bit of that for my own portfolio.

It doesn’t right on the [inaudible 00:08:41] for QAV but it was, I think, a standalone nickle mine, which was I think from memory at the time, it was the next highest QAV score, even though it was below our threshold, and that’s done really well for me. I bought it at 60 cents and, it’s now, about a buck, so in the last month or two. So, I think there is something in this buying the commodities as they turn. So, I’m going to suggest that we swap out those 200 dummy portfolios and put in CAA and C6C.

Cameron Reilly: 09:09 So this introduces a new element to our, when do we sell rules. They’re currently when it breaches its three-point trend line, significant bad news, you need cash for something else and just cause.

Tony Kynaston: 09:29 No. We had four senior people resign.

Cameron Reilly: 09:32 You know.

Tony Kynaston: 09:32 [Cross-talk 00:09:35].

Cameron Reilly: 09:34 Significant. Yeah. Major significant negative news, that’s people resigning. That’s part of that.

Tony Kynaston: 09:40 Yep.

Cameron Reilly: 09:41 Just because you want to flip it out now, what’s going on? This is a bit shocking, Tony.

Tony Kynaston: 09:46 Well, it shouldn’t be, I mean, maybe it comes under the heading of wanting to use the cash for something else, but it’s a bit of a test. I think if we sort of wait until another stock becomes a three-point sell or meets one of those other criteria for selling, we may have missed the upturn on these commodities, and I think it’s worthwhile just testing them.

Cameron Reilly: 10:04 Because it’s a dummy portfolio and see how they go.

Tony Kynaston: 10:07 So, these are guidelines, not rules. It’s not a religion.

Cameron Reilly: 10:13 No, seriously, like you go, okay, well, you know, yes, they’re the major guidelines for when we normally sell. However, you know, you can experiment if you want.

Tony Kynaston: 10:25 Absolutely. Yeah, exactly.

Cameron Reilly: 10:26 Now getting back to Doctor Copper, I actually used to know an actual doctor who used copper as part of his therapy process. When I was a kid, there was a guy in Bundaberg whose name was Mr. Pro. We refer to him as old Mr. Pro because his son Steven was young Mr. Pro, but I used to go here when I was like foxes age five, six. My grandmother took me on several occasions to see old Mr. Pro, and he had like a house that was like a clinic in the suburbs of Bundaberg, and you would go in and lie down on his table.

He would get a dividing rod and hold it over your body and go up and down your body until it moved and it wavered. From that, he would determine the cause of your malady, and I don’t know what was going on with me at the time that they took him there, but I obviously had something wrong with me beyond the obvious, too handsome, I think was the prognosis, but then what he would do is he had these little wooden boxes, about six inches long, a couple of inches high that he would put little rolls of colored cotton in.

They were like different; you’d have a specific combination of colors to cure you of your malady. This box then was attached vajra copper wire to a copper arm bracelet that you would wear on your wrist and you would lie there in his clinic for an hour wearing the copper bracelet, attached to a wooden box of colored cotton, and you’d have to come back, you know, every day or every week for a prescribed period of time and boom, cured color therapy. So, he was the real Doctor Copper.

Tony Kynaston: 12:29 Thank you. I was waiting for the point that’s great.

Cameron Reilly: 12:31 That was Doctor Copper.

Tony Kynaston: 12:34 Doctor Copper, okay.

Cameron Reilly: 12:34 He would use copper and colored cotton, and my grandmother swore he cured my uncle decades earlier than that of polio using this same therapy.

Tony Kynaston: 12:45 I would think if anyone cured anyone of polio that’d be very, very wealthy and wouldn’t be living in Bundaberg.

Cameron Reilly: 12:50 Hey, that’d be dissing Bundaberg. I I’ve thought for years, I’d love to go to bunny and dig down and do a documentary of that story because it’s one of those things I forgot about, you know, there’s another one that you just, you remember it and you go, what the hell was that? What? I’ve asked my mum about it, she goes, well, he did cure my brother of polio, and I’m like, well, so they say.

Tony Kynaston: 13:20 There you go. That could get in the laying of hands category, Cam.

Cameron Reilly: 13:23 Yeah. Pretty much.

Tony Kynaston: 13:24 The power of the mind. That’s what it is.

Cameron Reilly: 13:29 Yeah, and if you didn’t get better, well, you just didn’t believe in the cotton enough, you know. Your faith was lacking.

Tony Kynaston: 13:36 Yes, exactly. Well, I used to have relatives who wore copper bracelets and rings. It was supposed to cure arthritis.

Cameron Reilly: 13:43 Yeah. That’s still a thing, yeah? They still sell them in health food stores and stuff.

Tony Kynaston: 13:47 Yeah, right. People like Ernie and Bert, you know, sticking a banana and easy at the kitchen.

Cameron Reilly: 13:52 What? There were elephants. I don’t see any elephants. See it works. Yeah, classic.

Tony Kynaston: 13:59 Yeah.

Cameron Reilly: 13:59 Cape and Kelly, let’s talk about and Cape and Kelly.

Tony Kynaston: 14:02 One last thing, sorry to be on Doctor Copper before I go, there is people are like Capral aluminum and copper mountain, they’re both very small stock. So, it will be hard to buy into those if you have a larger portfolio, but if anyone’s interested check out OZ minerals which is lower down again on our QAV checklist, it’s not on the buy list. I think it’s got a QA score of around 0.03, but it would be the largest market cap copper ply on the ASX in terms of ranking. So, using the QAV score, the rank them, that’s the biggest one that comes to the close to the top of the list.

Cameron Reilly: 14:46 Right. So, check that out.

Tony Kynaston: 14:49 Cape and Kelly. Yeah, let’s talk about that.

Cameron Reilly: 14:52 So people won’t have heard this yet, but last week we…

Tony Kynaston: 14:57 Oh, okay.

Cameron Reilly: 14:57 That’s all right. We can give them some advanced notice. So last week we had a great chat with Stephen Moriarty. I think might’ve been Steven Mabb who suggested we get Moriarty onto the show. He is an investor. I think he’s part of like an investing advisory group. He’s got a book out, low rates, less risk…

Tony Kynaston: 15:22 Low rates, higher returns.

Cameron Reilly: 15:24 That’s it, and we had a great chat and it was a great book, and we sort of, you know, my feeling when I was reading the book was that a lot of the basics we agree with, there were some staff that I thought didn’t fit with what you teach in QAV, but my conclusion after the interview was, well, he’s talking to a level of investor. His stuff makes a lot of sense for a level of investor who’s lower down the you’re on the lower rung of your investment ladder sort of people that are at an ETF stage. His staff might help them get better returns out of their ETFs. So, it’s not really talking to a QAV level investor, so that’s fine, but he uses Cape and Kelly a lot, and I know you wanted to talk a little bit about Cape and Kelly on the back of that.

Tony Kynaston: 16:26 Yeah. Thanks. The reason for raising it now is that I won’t, well, why don’t we get these interview subjects. I want to try and learn from them and see if I can apply it to QAV and get better returns, and at some stage during the interview with Steve, and he said that he had gotten, I think it was a 23 percent compounding return. Now I think that was for the part of his portfolio that was invested because he holds lots of cash.

So, I thought I’d try and run some numbers for the last 20 years, because he was focused on indexes and ETFs on the Australian stock market anyway, and compare it to my own returns, but using the Cape and Kelly methodology, and I think we should do a show perhaps on, well, we will put out the Steven Moriarty interview, and if people want to know more about Cape and Kelly, we should probably do a show on it because it is interesting stuff. I’ve struggled to apply it to my own investing, but that doesn’t mean someone out there listening can’t teach us how.

Cameron Reilly: 17:28 Before we go further, can you give us like a quick two sentence description of Cape and Kelly?

Tony Kynaston: 17:34 Of course. Yeah. So, Cape is a 10-year average PE so rather than using a PE for the market for this year, it’s the 10-year average rolling average P for the market. So, it tries to smooth out the price earnings ratio for a particular market, and what it basically does is that it says if the market Cape sometimes called the Shiller ratio is high, you should have less invested in the market, and if the Cape Shiller ratio is low, in other words, a low P for the market, you should invest more. So, Kelly, says that we should use some Maths to work out how much to allocate when the Cape ratio is high or low. So, more cash when it’s high, less cash, when it’s low.

Long story short, the Maths basically says when the odds of an investment are tipped in your favor, you should invest more, and there’s a whole history of it going back through how the play better black Jack to signal intelligence back in the sort of world war two periods, et cetera, et cetera. So, it’s very interesting. The book’s called Fortune’s Formula, which goes through the whole history of it. I highly recommend it, but yeah, we can talk about it in detail at some stage, but basically what Stephen was saying was if you’re an ETF investor, you want a hold a certain amount of cash in case things go wrong for you. You can put more cash into the market, sort of dollar-cost average there, and when things are going really bad in the market, you should have your best allocation to the market and the least amount of cash.

So, I ran with that through a spreadsheet using the Cape ratio for the US market, which is what he suggested, but applying the Australian index to that. Interestingly enough, for the Australian market your returns were lower if you use Cape and Kelly, to time your entry and exit into the market, or your weightings of cash going higher or lower into the market than if you just had everything all in all the way along. So that’s the first thing I found.

I understand Steve does a bit of a tweak on that, so he gets better returns on that, but I also thought, and I guess the fundamental thinking behind the strategy is that if you had been taken away profits before, say the GFC came along when the Cape ratio was high, you would have less exposure to the market and therefore the civil loss, and you would have more cash on the sidelines to buy back in after the GFC, when the Cape ratio was low. So, the PE ratio was low for the market. I found that, that didn’t work for me because even though you do take a big hit during the GFC, you’ve had outpaced returns before that, because I’m staying fully invested in getting QAV like numbers got you that much further ahead than if you had played the cash on, cash off game, according to the Cape ratio, and just to run through some numbers just quickly investing a hundred thousand dollars into an index fund in 1998, grew to 719,000 by 2020.

So nice returns, but over 20 years doing the same, but splitting the a hundred thousand into cash and shares, according to the Cape ratio only made 390,000, but you had less volatility, and then my track record, so using my personal record year on year investing a hundred thousand in 1998 but keeping it, all invested was 2.5 million by 2020, but using the Cape ratio allocation of cash in shares only grew to 971,000 dollars. So, this has always been my take on this whole sort of argument is that yes you have low volatility.

Yes, when the market turns down, you take a lower hit. Yes. When the market’s low, you can put more in, but you, by having cash in the market it acts like a boat anchor, and seriously reduces your return. So, I think you’re right in your summary, Cape and Kelly are good for people who are on the lower rungs of the investment ladder, but people who are getting outsize returns, the cash component holds them back.

Cameron Reilly: 21:54 Yeah. So, to clarify or expand on something you said at the beginning of that, he said he got, I think 23 percent last year on his equity component, but that was only 10 percent of his portfolio. He had his other 90 percent in cash. So obviously the actual return on his entire portfolio is going to be a lot less than 23 percent of 90 percent of it’s sitting in cash for the year, so.

Tony Kynaston: 22:20 Yeah.

Cameron Reilly: 22:20 He said that himself in the show. So yeah, so you’ve gone and done some regression testing on moving in and out of cash versus your strategy, which has to be fully invested at all times, correct?

Tony Kynaston: 22:34 Yeah. I just wanted to run those numbers down after the interview because it was bugging me that, well, it wasn’t bugging me. It was bothering me that you had 23 percent last year. So that was one thing. So, I thought, can I learn but more so could I adopt what he was saying to our portfolio, and I don’t think I can. You get lower volatility, but you get lower returns as well.

Cameron Reilly: 22:55 Well, and congratulations on continuing to play the role of our intern, doing our regression testing for us. Before we move on, I wanted to give a shout out to Damien Parker. One of our listeners down in the Gold Coast stopped in to visit him and his lovely wife, Maureen. We had a coffee yesterday on our way back from our little weekend away in the Gold Coast Hinterland. So, thank you to Damien for taking time out, to have a chat, and he’s going to come on the show in the next couple of weeks and tell us about his investing and he’s got a great background and story himself. He wrote a book on business checklists back in the, I think the eighties or the nineties that sold something like 50 or 60 million copies. So, looking forward to hearing more about that.

Tony Kynaston: 23:46 Wow. Yeah, that’s great. Maybe he can ghost write our walk and tell a few.

Cameron Reilly: 23:51 Yes. I’m sure he has nothing better to do with in this time. All right. Here are the questions.

Tony Kynaston: 23:59 Hang on a couple more things before we do that.

Cameron Reilly: 24:02 Okay.

Tony Kynaston: 24:02 I want to just report a little bit on gloating a bit here, so I’ll probably have a full this week, but I know I’ve said before in the past that one of the reasons why I use a full-service broker is to get access to IPO’s and I’ve managed to have a small allocation. It was around 45,000 dollars into an IPO that Alex Haye, my stock broker brought me. This is one of the runs through the process. So, a couple of weeks ago, Alex called me and said, do you have any money? Do you want to go into this float? The company’s called Clean Space and they make ventilators and respirators they’re ex [inaudible 00:24:39] staff. Who’ve gone off on their own to do that. He basically called me on Friday with her the chance to get into an allocation. I had to sign up by Monday and pay the funds by Tuesday. Anyway, so long story short, the company listed yesterday at four, sorry, Friday at 460 and the price today was 721.

Cameron Reilly: 25:00 What’s the code?

Tony Kynaston: 25:02 It’s called Clean Space. So yeah, so it’s done really well for me. From here, I’ll probably just try CSX. I’ll just try using the three-point trend lines and seeing how I go. Ideally, I’d like to keep it for 12 months and reduce my capital gains tax, but it’s yeah, if it starts to go down and I’ll probably sell and lock in the profits from the initial stage.

Cameron Reilly: 25:24 Right. So that was good, and then next Tuesday is not only the American elections, it’s Melbourne Cup. So, we talked about Melbourne Cup tips last week. So, I’m hoping to have some tips for people which maybe you can put out on the Facebook page or via an email next Monday, at least by Tuesday morning, next week. Hopefully by Monday.

Tony Kynaston: 25:46 Yeah, QAV Club subscribers only, sorry, free listeners shared a luck.

Cameron Reilly: 25:53 Other questions?

Tony Kynaston: 25:54 You’re done. Yeah, I’m done.

Cameron Reilly: 25:54 Okay. Andrew asks, hi Cam and Tony I’ve been slogging my way through Ben Graham’s book the intelligent investor and he suggests that value investors should take into account a company’s level of debt. Is this factored into the QAV checklist when we consider net equity. If not, do we, or should we consider it in another way? I know we’ve talked about this before.

Tony Kynaston: 26:17 Yeah. So, congratulations to Andrew for going through that doorstop of a book and it’s, you know, Britain in the 1930s, so the language is a bit old fashioned as well, but it’s a good book, but pay attention to the chapters on the market is a voting machine, another weighing machine and the one about Mr. Market being your neighbor who has a bipolar disease and comes to offer your price for your company every day, whether he’s feeling high or low. So good going you for that. We do take the debt levels into account, but we do it via the Stock Doctor and its financial health ratios, and so if Andrew is a Stock Doctor subscriber, he can go into a company and have a look at the health ratios, and if he looks at the balance sheet ratios, there’s one, two, three, four, five, six, seven odd ratios in there, which compare debt to assets and cash to debt, and a few other things aren’t going to them here because they’re IP for Stock Doctor, but they’re there and you can look at them there. So, we use the financial health ratios from Stock Doctor and a couple of our checklist items. One is that the health ratio is good, and the other one is that it’s trending up.

Cameron Reilly: 27:35 Right. So, it is in there even though we don’t break it out specifically in the checklist.

Tony Kynaston: 27:40 Correct. If we didn’t have access to Stock Doctor with a mandatory checklist to specifically look at that debt-to-equity ratio though, it’s important.

Cameron Reilly: 27:46 Okay. Part two of Andrew’s question in the spreadsheet, stocks score a point. If the share price is below the Lincoln or analyst’s valuation of its fair price. Hypothetically, if the valuation price was a dollar and the current share price was 98 cents, it would score a point, even though this difference could be within a reasonable margin of error and the share price, just as likely to go down as up. In my own spreadsheet, I’ve added an additional column where the stock will gain an additional point if it is at least 20 percent below the analyst valuation. My thinking, being that in this case, the share price is just as likely to go nowhere, but hopefully more likely to go up than down. Can you see a flaw in my thinking and logic here? Thanks very much for your time and thoughts, Andrew.

Tony Kynaston: 28:35 Can’t necessarily see a floor in your logic, Andrew, and I liked the idea that you’re modifying the checklist for your own use. I’d love to know what your experience of that is in time. A couple of thoughts around this. First of all, I’ve come to the opinion over the years that people can’t value a company to within anything like a dollar anyway. So, if the stock price is 20 percent below or 1 percent below, I think the more important factors it’s below what someone thinks like Stock Doctor thinks is fair value. So, I think the IV is more of a directional indicator rather than a perfect indicator or a specific indicator. So that’s the first thing.

The second thing is that if a share price is way below what the market consensus is for its IV or what Stock Doctor thinks it’s IV or what we think it’s IV is there could be a reason for that, and you know, that’s why sentiment plays a big part in this because something that’s very cheap compared to what the market thinks it should be may have a reason for that, and so we look at sentiment and say, is it cheap, but it’s going down. So, for example, [MAYA 00:29:48] we looked at, or Apollo Tourism and Leisure we’ve looked at they seem to score well on our measures, they’re below IVs. I think from memory in the market, as well as with a consensus IV among stockbrokers ROV and with Stock Doctor, but the share prices are going backwards.

So, the three-point trend line is important, and I say that, that probably holds more for bigger companies where there’s lots of stockbroker of research and analysis on them than the small companies. I’m quite happy buying a small company that doesn’t have a consensus IV or a stock Doctor IV because I just think the IV is kind of more like a radar map of where valuation is, rather than anything you can lock in and pay really close attention to. I think there’s also a bit of a pendulum effect that goes on too. So, we ride that pendulum, so yeah, you’re right.

The IV might start off being, or the stock price might start off being a long way below IV and then get close to IV and then ride a long way above IV because of this pendulum effect that you know, people come on board more and more as the stock gets more and more notice, and the stock gets more and more notice because the share price is going up and it becomes a nice little virtuous circle for us. So that, that means I would still buy into it if it was close to its IV price, because I think oftentimes, they have more to run than that, but yeah, they’re my thoughts. Like I said, I’m not paying too much attention to the gap between the price and the IV, but I’d love to know your thoughts or all your experience after you run that through your checklist after a while. It’s another one to throw to the intern to do some regression testing.

Cameron Reilly: 31:33 Yeah.

Tony Kynaston: 31:33 If you want to be our intern, Andrew, let us know we’re looking for an intern.

Cameron Reilly: 31:36 All right. Next question, one of Brett’s many questions. Hi Cameron three PTL question for Tony after this month passes, I’m curious how Tony would draw the by line for IGN, Ignite Limited. October, 25th gains the highest point, so once it rolls over, there are a few months coming up with 21 cents as the highest point. Does Tony draw the byline horizontal at 21 cents or fudge-it may be used May, 2016 at 21 cents as the first point and either July, 2020 at 0.033 or November 29.054 as the second point. If so then the buy price looks to have dropped from 0.097 today to about 0.02, two or 0.013, these are dollars in two weeks’ time, which is a huge change and triggers the buy at today’s price. Thanks, Brett.

Tony Kynaston: 32:48 That was probably a lot…

Cameron Reilly: 32:49 Lots of fudging.

Tony Kynaston: 32:50 To follow on the [inaudible 00:32:54].

Cameron Reilly: 32:56 Yes.

Tony Kynaston: 32:56 Over a podcast.

Cameron Reilly: 32:56 You have to sit down and pull it up on your computer.

Tony Kynaston: 33:00 Yeah. If you did that, what you’d see is that it’s a falling trend line for most of the five-year period. So, it’s high at the left and low on the right, but in the last month or two, it’s starting to tick up. So, it’s a bit of a J curve going on there. So, to answer the question, it just depends how conservative you want to be. At the moment, if you drew a buy-line, you get a price which is higher than the current share price. Once the shares, the graph moves to the left, the high points change and as Brett? Yes, Brett says you’ve got a flat 21 cent buy price, and the share price at the moment is 3.30 cents. Or if you fudge it, you’ll get by price as lower as Brett says, it’s really up to Brett. I mean, just looking up what the QA score for Ignite. I’m pretty sure it’s not a buy. So, you know, that’s the first question to ask is why were you even looking at this? But we’ll do it just for as an example. Okay, so buy them, you just have a the QAV score for Ignite.

Cameron Reilly: 34:13 No. It’s not in the buyer list you said in the last week.

Tony Kynaston: 34:16 Sorry. So, I can’t understand why Brett’s looking at it. The QAV scores 0.61, but it’s not in the buyer list.

Cameron Reilly: 34:22 What?

Tony Kynaston: 34:22 Yeah.

Cameron Reilly: 34:23 Oh, it’s not in the buyer list.

Tony Kynaston: 34:26 No. It’s not in the buyer list. It’s the one going down. So, what Brett’s asking you is at what point do I fudge-it to make it a buy.

Cameron Reilly: 34:27 Okay.

Cameron Reilly: 34:27 It just comes down to happen how well, if you really want to buy this company, because it has a good QAV score, then buy it. You certainly can’t fudge-it to get a price as Brett has done, which is below the current price. So sure, go ahead and do that, and this question, isn’t Kenny it’s what would you do?

Tony Kynaston: 34:49 Yeah, so. I’m just sort of getting to that. I’d probably wait, and the reason why I wait is because the share price is just ticking up, and as I said, it’s been on a downward trend for a long time. So, the risk is it could be a Schrödinger. It could turn down again, even though the last couple of months have been pretty good. It sorts of, it hasn’t really established itself as a strong uptrend yet, and if you took a conservative view of the buy-line, it’s not a buy, so I’d be waiting to refer it to establish more of an uptrend, and I’m happy to trade off, I’m missing out on maybe the first 10 or 20 percent of the share price increase for knowing that the trend is sustained.

Cameron Reilly: 35:32 Yeah. I mean, we’ve been bitten on the ass with that a couple of times.

Tony Kynaston: 35:37 Yeah, we’ve.

Cameron Reilly: 35:37 Having tried to tackle these things. It looks like they’ve breached it, then they fall back down.

Tony Kynaston: 35:41 Yep. Okay. Good one, Brett. So bottom line is in summary. If you, you know, you can fudge all your one to Tom Cruise levels, fudge, if you really want to, but that comes with a risk.

Tony Kynaston: 35:56 Yeah, and especially in a company like this, I’m just I think it’s got a pretty small average daily trade of 949 bucks. I’d be more inclined to buy into it if it was a big company, because I know I can get out then if it turns down again, but for this kind of small company, if I went in and bought 500 dollars’ worth of shares in this company which is half its average daily trade, and then the share price turns down again, because it turned out to be a Schrödinger. I’m going to drive the price down further by, you know, trying to sell out a large stock compared to what the market can absorb.

Cameron Reilly: 36:33 949 bucks the hell, man. Thank you, Brett. I was going to add some other point there, but I can’t think of what it was. Okay. It doesn’t matter. Oh yes. I was going to say charting tool in Stock Doctor. I’m having all sorts of problems today with the expanded charting tool. It doesn’t bring up, my five-year monthly automatically, it wants to give me all sorts of different things and when I click monthly, then it changes to, you know, last week, and then I choose that and it goes back to weekly looking at five years, you having any problems with it or is it just me?

Tony Kynaston: 37:12 Just you, I’m good.

Cameron Reilly: 37:14 Okay. Camera having strikes here.

Tony Kynaston: 37:17 Yes. Stop backing my horses, will you?

Cameron Reilly: 37:19 Yeah. Sorry, now that I feel bad.

Tony Kynaston: 37:21 I tell you what, if you pay me to not back your horses, I will not back your horses.

Cameron Reilly: 37:27 Yeah. Gotcha. Yeah.

Tony Kynaston: 37:31 We’ll see.

Cameron Reilly: 37:31 Dave W. With KCN now cashflow negative, would TK sell it if he owned it?

Tony Kynaston: 37:42 Good question, and I was racking my brains when I saw this question, trying to think of an example and I can’t. I’m fairly sure it’s happened to me at some stage over the years, but I can’t think what I did. So just thinking through the logic of it, I’m looking at Kingsgate now as a graph it’s in a pretty sustained uptrend. So, I don’t think the lack of operating cash flows really affecting the market sentiment towards Kingsgate, and potentially that’s always the case with mining companies in particular, because oftentimes sentiments driven by exploration results. If it was me, I own Kingsgate and I don’t, I would be holding on until I saw a downtrend in the share price graph. It may come because of the operating cashflow, but at the moment it hasn’t. So, I would hold on and be guided by sentiment.

Cameron Reilly: 38:34 Follow the rules.

Tony Kynaston: 38:35 Yeah. I mean, you could fudge the rules if Kingsgate dropped, you know, 10 or 20 percent, that might be enough to convince me that operating cash by being negative was having an impact on sentiment, but doesn’t appear to be the case at the moment.

Cameron Reilly: 38:51 Well, just eyeballing it. The sell price is probably 48 cents give or take, and it’s currently at 83.15. That’s a big way you do. So, you’re going to lose 50 percent if you wait for it to breach.

Tony Kynaston: 39:11 Yeah. So, I think…

Cameron Reilly: 39:13 [Inaudible 00:39:12].

Tony Kynaston: 39:13 I’d probably sell out earlier with a big sort of fall of 10 or probably 20 percent.

Cameron Reilly: 39:18 Right.

Tony Kynaston: 39:19 That’s how I be happy staying at around 70 cents. I guess. I’m not giving any recommendations. See, I’m saying what I would do.

Cameron Reilly: 39:26 Yeah.

Tony Kynaston: 39:26 Yeah. Negative operating cashflow may have an impact on the sentiment at the moment. It doesn’t seem to be, so I would continue along happily putting it rise.

Cameron Reilly: 39:36 Right. Does it matter these days? I mean the entire country has got net negative operating cashflow. No one’s jumping out of windows. Just go and print money like everyone else does. Yeah. CMMT. That explain what Clayton’s was to Chrissy the other day, not being in Australia. She said, oh, that sounds great. There should be more of those things. Why isn’t there a complete range of non-alcoholic mixes for people like her who don’t drink? I said, it’s got a deal. We should start that business then I think it could do well.

Tony Kynaston: 40:09 Yeah, I think I try but it doesn’t really hold in Australia. That guy broke.

Cameron Reilly: 40:13 Because we’re a bunch of alcoholics. It’s a nation of alcoholics. Okie-dokie. Moving right along back to another one of Brett’s questions. Question to ask Tony about sentiment. I’m looking at MFF the sexiest stock on the market. It’s high on the QAV buyer list. At two dollar sixty-one is well above the buy-line. However, it’s only a bee’s Dick above the sell-line, as I draw in, anyway. If Tony had an opening and this was the next available on the buy list, would Tony buy this one or move on to another that isn’t so close or would he just buy it and see where it goes?

Tony Kynaston: 40:52 Yeah, I think I’ll move on. This is MFS pretty close to being a Schrödinger, if it’s not already, so I’d leave it until the direction was clear.

Cameron Reilly: 41:01 Yeah. It looks like a Schrödinger, and to me from the graph that he sent us.

Tony Kynaston: 41:05 Yep.

Cameron Reilly: 41:06 Second part of his question is does Tony sell as soon as something breaches the sell-line stop-loss style or does he wait a short while to confirm the downward sentiment?

Tony Kynaston: 41:19 I’d sell as soon as they get breached.

Cameron Reilly: 41:22 I think we had this one recently, right? Like last week and the week before.

Tony Kynaston: 41:25 [Cross-talk 00:41:25] end of month, but I would sell before a breach. I would sell it as soon as a breach.

Cameron Reilly: 41:29 Soon as it breaches, usually. Yeah.

Tony Kynaston: 41:32 Because it’s basically a sign that the sentiments falling through their ass, right?

Cameron Reilly: 41:36 Correct. Yeah.

Tony Kynaston: 41:37 It’s safer to be out that could turn back, but it’s safer to be out, I think.

Cameron Reilly: 41:42 Yeah. Okay. More from Brett on the recent buyer list. I think the following may have dropped just below the buy-line. Please, double check, don’t take my word for it. Now he’s going to list the stocks here. Now I did go in and look at all of these before I sent you the email and my initial, if we take the first one MYE for people playing at home, bring up mastermind group MYE, not my group. That’s MYR. I made that mistake the first time around. If you look at MYE my initial reaction was, yes, it probably has dropped below the buy-line, but then I thought, oh, hold on a second, Coniston is going to get me on this, like he often does because I don’t think it’s never breached its sell-line. So, it seems to still be good.

Tony Kynaston: 42:37 Yeah. I’m just pulling up the chart now, so bear with me. Sorry, and I noticed this with a few of the things that the questions that Brett was asking you about, don’t forget the buy-line fall follows of sell-lines. So yeah. So, mastermind looking at this, this is the first thing I would do in this kind of graph is to go and look at where the sell-line is, and that was, I think it was first the sell back in about February, 2020, and then draw the byline based on the next point after that, where it was a buy.

Cameron Reilly: 43:13 Oh, hold on a second. You think it breached its sell-line then?

Tony Kynaston: 43:17 It first breached it.

Cameron Reilly: 43:20 Okay, because that would have been, yeah, right.

Tony Kynaston: 43:22 It’s currently above its current sell-line, if that makes sense. If you use the whole graph inactive to lowest points, the share price is above its current sell-line. Right. So, at some stage in the past, it was a buy.

Cameron Reilly: 43:38 So starting with the first lowest point sort of June, 2016, and then if you draw a line through like, I don’t know, it’s sort of May, 2017 or June, 2017.

Tony Kynaston: 43:57 Yeah.

Cameron Reilly: 43:58 So then it would have breached, you’re saying like February 2020, correct?

Tony Kynaston: 44:03 Right.

Cameron Reilly: 44:04 Then our buy-line, where would we start with?

Tony Kynaston: 44:10 Ah, so I’d go back to the highest point on the graph because it’s to the left of that, and so that is September, 2018. Yeah, and then the next highest you use August, 2019 and I’ll draw my line. So, it becomes a buy again, back in about a couple of months ago, when is that?

Cameron Reilly: 44:34 Was it by July?

Tony Kynaston: 44:35 August. Yeah. August, 2020, July, August 2020. So, it’s currently a buy and it hasn’t breached that sell-line, which is a new sell-line because the buy-line follows the sell-line. So, you’ve had it in the sell-line follows the buy-line. So, we’ve had a buy and a sell over that time period. The new sell-line I would be drawing at…

Cameron Reilly: 45:00 74 cents-ish.

Tony Kynaston: 45:01 Something like that. Yes. I was going to say the lowest point would be June, 2016. Next lowest point would be probably June, 2020. Yeah. So, it’s a buy.

Cameron Reilly: 45:16 Right. Yeah. See, I need, get me with that one.

Tony Kynaston: 45:22 I think this is…

Cameron Reilly: 45:22 [Inaudible 00:45:22].

Tony Kynaston: 45:22 Probably the same comment can be made with all these ones that Brett’s given us.

Cameron Reilly: 45:29 That was my thinking too, as I started to go through them and take a second crack at them was yeah, they all fit that kind of pattern. They’re all up over local. Yeah. So particularly, I mean the obvious one to look at, which I think is probably the simplest graph of this type is for the ski metals group, which was also on Brett’s list. Yeah, and if we look at FMG, if you are taking the two highest points on the graph, now it wouldn’t be a bias because those two high points.

So, there are around 1742 and 1741 back in July and August of this year and the current price of 1683, which is below that. So, you wouldn’t be a buyer, but the general trend for the graph is up, and if you go back and have a look at its kind of a lightning bolt along the way. So, it went up until about January, 2017, where it then started a bit of a downtrend. So, if you had bought it before then you were doing well, but you probably would have sold around then, and then you would have taken the high point and the next highest peak to the right of the high point. After that sell and you would have been buying it again around about January, 2019, and it’s been way above the sell price since then.

Tony Kynaston: 46:01 So you would have been holding all the way along.

Cameron Reilly: 47:03 So there’s two ways of looking at it. Do I buy in now? I’d say you’ll still buying now because the share price is going from low left to high. Right, and the buy, based on the first by following the most recent sale is January, 2019.

Tony Kynaston: 47:19 Right. Yeah. Okay. Good one. So, I think you’re [cross-talk 00:47:26].

Cameron Reilly: 47:26 [Inaudible 00:47:27] sell-line.

Tony Kynaston: 47:26 Yeah. We did a show on that. The buy follows the sell. So, Brett might want to go and…

Cameron Reilly: 47:32 Yeah, we did.

Tony Kynaston: 47:32 Listen to that too.

Cameron Reilly: 47:34 Me too. I need to go back and listen to that. I also need a tool that just does that for me.

Tony Kynaston: 47:40 I know I do too, and apologies to Andre Bravo if he’s listening, I need to get back to his coding and go through it, but I haven’t had time or an intern to help with all those things.

Cameron Reilly: 47:51 Yeah. Andrew, the new intern, maybe Brett’s the intern.

Tony Kynaston: 47:54 Yeah.

Cameron Reilly: 47:54 He’s done a lot of work for us. So, another Brett had here is he’s asking when we upload the buyer list each week, if we can include stocks without confirmed sentiment, but with a good QAV score. So, I guess that would have been the one we were talking about earlier, right. IGN would have…

Tony Kynaston: 48:18  Yeah, that’s the next step was there and I know we’re not making the full download available until we sort of saw what doctor think is kosher or not, but that’s basically there in the download list from the Stock Doctor filter, and then we just take those which have confirmed sentiment and make them the buyer list, but we can certainly put it on a watch list of companies that score as buyers on the QAV checklist in terms of the score, but don’t have sentiment in favor of them at the moment. There was a second table that Brett centers, which you sent through to me as part of a prep for the show, and these were companies which Brett thought had reached their buy-lines or they’ve crossed their buy-lines, but we hadn’t put into the buyer-list, so I think he may be right with some of those. So, I’m just going to go through those offline and work through it and then put out a journal to see if they buy or not.

Cameron Reilly: 48:21 Great. Yeah. Well, thank you. Thanks Brett. John Matron, hi, Cam thought came up when there were loads of shares on the buyer list, but I could only buy two. Some of the companies on the buyer list used their retained capital more effectively to make more profit than others. This is measured by return on shareholder capital. Some also grow their sales more than others. Could we rank these higher?

Tony Kynaston: 48:48 Yeah, I mean good question, and I think this comes down to, I think it was Andrew’s question about IVs. If you want to modify a checklist, please do. My take on this is I’d have to run some tests on it and check it out. In terms of the retained capital, I have on my list and I haven’t gotten to it yet is to see if the ROI see return on invested capital makes a difference. Having a chance to get to that, sorry, John, but yeah, if you have some experience, please, share it, and yeah, that’s all I can really add at this stage. In theory, it should improve the returns, but I just haven’t gone through and tested to see if it does.

Cameron Reilly: 49:37 Well, throw it to the intern, and last question for the week from Andrew McLennan, does anyone know why the health ratios for MQG are not accessible on Stock Doctor? It’s been like that for the last few weeks that I’ve looked and I haven’t seen any other stock with the ratios grayed out. This is Macquarie, right? Macquarie Group. I did have a look at this and I noticed that their reporting period seems to be September, September, or March. I wonder if they’re waiting for their September results to come through.

Tony Kynaston: 50:19 No, I don’t think so. I think, the reason is that because the Stock Doctor ratios don’t work for banks or financial institutions because they have different needs in terms of borrowing that a retail bank, and I know Macquarie is more than the retail bank, but the retail bank takes the posits and leverages them and then lends out mortgages, and so the level of debt can be a lot higher than like an industrial company or a mining company, and so Stock Doctor found quite early on that their financial health ratios didn’t work for banks, and so that’s why it’s grayed out. Don’t try and do it.

Cameron Reilly: 51:05 Right, but they’ve got stuff for them for previous quarters or halves.

Tony Kynaston: 51:10 Okay. Maybe I’ve got that answer wrong then, but it was my understanding of it. Let me have a look, Macquarie. Couldn’t be the case that they’re about to report, but I don’t think so. There’s no reason why they weren’t showing the most recent numbers from March still. If I go in and look at, say Commonwealth Bank CBA, they’re also grayed out. If I look at Westpac, they’re also grayed out. Yeah. So, I think it’s the banks have them grayed out. Yeah, and for a long time, they wouldn’t give, they still give the banks and Macquarie banker a score. So, I’m not sure. I think from memory I have to; we should probably ask doctor, they do have a special list of metrics they use for banks, but it doesn’t fit their template. So, I think they still give a financial rating for the banks, but they don’t go into all the detail of it because it’s a different model that they apply.

Cameron Reilly: 52:25 All right. Well, I will shoot stock Doctor a query on that and see what they come back with.

Tony Kynaston: 52:28 Yeah. Did we cover John’s question about using the buy-list to, sorry using the checklist to workout tech companies?

Cameron Reilly: 52:42 No, we didn’t.

Tony Kynaston: 52:42 No, sorry. I missed the second part of this question.

Cameron Reilly: 52:47 He said a thought for another time I was using a modified version of the checklist for growth companies this, oh, no, it’s a suggestion to use. This would involve investor meeting future profit IV two or IV three. If no more cash was spent on marketing. This was a tip from your recent interview with the social tech investigator Billie Al.

Tony Kynaston: 53:08 Yeah. Look, that’s a good question. It’s again, potentially we could test it and se. I know I’ve seen some analysis, which suggests someone like zero could become profitable if they stopped their marketing because they had enough of a customer base now, but it would be a reasonable amount of work to back out those marketing figures and try and work out what their profitability is.

Cameron Reilly: 53:36 You could also factor in how long they would survive if they didn’t spend 30 percent of revenue on market [inaudible 00:54:43].

Tony Kynaston: 53:43 Yeah, you’d have to make some kind of [inaudible 00:09:44] as to how much marketing they would have to do, but the other point I wanted to make about tech companies and I should say, John, if you want to go and test that great, if you have some thoughts on tech companies, great. I know I said this last year, I’m probably the boy who cried wolf, but the hiring valuations of these tech companies get the more and more, I think it’s coming to a day of reckoning and the least compelled I am to try and work out some way to invest in them. I just, again, it just really smells like 1999 to me all over again. Yeah, anyway, we’ll see how it works out.

Cameron Reilly: 54:27 You worried about airplanes falling from the sky?

Tony Kynaston: 54:29 Nope. Well, that was Y2K, wasn’t it?

Cameron Reilly: 54:33 Yes.

Tony Kynaston: 54:33 Yeah. I’m not worried about that kind of catastrophe. What does concern me is that in in 2000, 2001, when the NASDAQ crashed cited the stock market. So, you know, we can’t escape the fallout, but that’s why I like having the three-point trend line to stop losses out on the way down and then buy in later.

Cameron Reilly: 54:57 Yeah.

Tony Kynaston: 54:58 Yeah, me too. All right. Well, before we finish let me give a shout out to our most recent club subscribers, Peter C., James F., Doug V., Tim R., Luke V., Vineet S., Lucy B., Andrew C., and U.L. Welcome to the show this week, guys. Just tips for new players, feel free to ask us any questions. Don’t worry if you think we might’ve answered it before or not, that’s fine. There are way too many episodes to troll through. If you’ve got a question, just ask it and we’ll answer it, doesn’t matter. Also make sure if you haven’t already take a look at the getting started guide, AKA the QAV Bible.

Somebody mentioned to me in an email today that they were struggling with understanding all of the metrics and the checklist. We’ve explained them all in some level of detail, in the getting started guide. If you need more detail, just let me know, and I’ll flesh it out further for you, and also if you haven’t already, my recommendation is go back to listen to episodes 301, 303 and 305. They’re sort of the introduction episodes that we did earlier this year as part of the reboot of the show during COVID when we had some time on our hands. So, go listen to those and sort of give you the background on the checklist and also check out the videos on our club member resources page. There’s a lot of content there for you to absorb at your leisure, but the main thing I wanted to say is if you have any questions at all, email me, and don’t be afraid to ask questions that may have been asked before it’s all good.

Cameron Reilly: 56:41 Absolutely. Yeah.

Tony Kynaston: 56:43 What horses you’ve got running this week, tiger?

Cameron Reilly: 56:47 Don’t have any this week.

Tony Kynaston: 56:47 We’ll run Thursday week.

Cameron Reilly: 56:49 Thank God for that.

Tony Kynaston: 56:49 What was that? Thank God. Yeah. No, all I want to say before we go, is that a really, really interested in what’s going to happen with copper and aluminum and zinc and nickel. I’m jonesing for copper.

Cameron Reilly: 57:08 Let’s see how it goes.

Tony Kynaston: 57:10 I’m really interested to see what happens with the US election next week, so.

Cameron Reilly: 57:15 Yeah. That’s going to be, it’s going to be something either way. It’s got to be something.

Tony Kynaston: 57:21 Yeah. Will I get the impression? We won’t know what’s going to happen for a long time after the election though, Reilly.

Cameron Reilly: 57:27 Yeah, but I think even on the day, like the there’s going to be a whole bunch of fallout. Craziness.

Tony Kynaston: 57:36 Yeah.

Cameron Reilly: 57:36 Anyhow. So much for that. Have a good week, Tony.

Tony Kynaston: 57:40 You too Cam.

Cameron Reilly: 57:40 Thanks a lot.

Tony Kynaston: 57:40 Thank you.

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